Weekly view - No landing for now
Recent data suggests achieving 2% inflation remains a distant target for central banks, with strong services and labour markets supporting price rises. In the euro area, the flash purchasing manager indexes for February showed persistently elevated prices in services in particular, while consumer confidence reached its highest level in a year. The mood among both euro area corporations and consumers is improving on the back of lower energy prices and China’s re-opening. Better data since the start of the year should push the European Central Bank (ECB) to hike its deposit rate by a further 50bps at its Governing Council meeting in March. In the US, minutes from the Federal Open Market Committee meeting earlier this month similarly highlighted persistent price pressure in services and mentioned “inflation” 96 times and “recession” six. The minutes’ hawkish tone was consistent with an annual core personal-consumption expenditure (PCE) rate of 4.7% (well ahead of expectations) and a 1.8% rise in consumer spending in January from the prior month. Markets are now wondering whether the Fed should have raised rates by 50bps on 1 February instead of 25bps. This week we will look closely at the Institute for Supply Management PMI and Conference Board’s consumer confidence figures in the US as well as Chinese PMIs.
Resilience and price pressure in services resulted in upward repricing of central banks’ terminal rates last week, which weighed on equity valuations. But European equities declined less than US ones, probably due to lower valuations. The Nasdaq Composite, where valuations look particularly rich, lost 3.3% last week (in USD). This week will see major US retailers present results, with inventory management an important focus. We are underweight equities and hold put options on the Nasdaq. Higher rates increase the prospects that accidents will happen. US credit card balances and delinquencies are on the rise. Outside the US, South African electricity supplier Eskom required government debt relief.
Geopolitical tensions and Western-China decoupling moved up a notch last week. Russian president Vladimir Putin declared that NATO is effectively "taking part" in the Russia-Ukraine conflict by donating arms to Ukraine and claimed the West plans to break up Russia. The CIA indicated that China is considering delivering arms to Russia, which it regards as a "very risky and unwise bet". State-owned Chinese enterprises will no longer work with the Big Four accounting firms and the European Commission is banning TikTok from government devices. The US raised troop numbers in Taiwan from 30 to 200. Russia abandoned the STAR nuclear treaty and Biden visited Ukraine. We consider adverse geopolitical developments a major risk factor for 2023.